An interview with Peter Stracar,
CEO for GE in Central and Eastern Europe
A conversation about the significance of the region to a global company like his and challenges for further growth. The interview took place at the think.BDPST conference on March 8th, 2016.
Wojciech Przybylski: In what way is this region important to a company like GE?
Peter Stracar: I would say that GE needs Central Europe and I think Central Europe needs GE. I mean it without any sign of arrogance, I think it’s mostly about partnership. We have been here for the last 25 years. We are a global company, we are a European company, and we are a Central European company. We were part of developments in this region in the last 20 years or more, so we are in a very symbiotic relationship.
Symbiotic with economies and governments of particular countries only?
And with our partners. We have built a very strong base here. Our supply chain and manufacturing activities are significant. 90% of what we produce here is exported to the EU and a lot to emerging markets. There is an example here in Hungary, from our plant in Veresegyház. The products we make here go to Indonesia and Egypt, helping to power those countries. We also have 5 R&D centres in the region and we participate in modernising the region. The technologies we have in power and energy management, as well as in healthcare, also contributed to the progress of the region. We are fully integrated here, and that’s very important.
And how important are the region’s human resources or the quality of education? It seems that even though the level of education is good, there is still a need to upgrade the curriculum.
One of the reasons why GE came here and decided to invest and become active here, was the upcoming opportunity we saw – with the markets opening and the quality of people. This is one of the factors we always look at. We are in the technology business – we are a digital, industrial and technological company, therefore innovation and the quality and skills of people are a decisive factor to us. I’ll give you an example from Poland. More than 10 years ago we opened an Engineering Design Centre in Warsaw, which started with 10 people. Today we have 1900. And 10 years ago nobody thought: “We’ll put it there and in 10 years it’s going to be 2000 people”. But because we found a working model involving private-public partnership and we were able to attract a lot of great engineers, it developed a speed that hadn’t been planned originally.
It was all because of the driving force of those young engineers who design products for the aviation sector. You will find elements that were designed in Warsaw in the latest model of an aircraft engine flying around the world. Not to mention other research done in the energy sector, the results of which were later implemented. That’s exactly what made our plans develop much more quickly than we actually anticipated.
With the relatively cheap and good workforce it was possible to achieve that result by now. But what about fears of a middle-income trap? What is your take on that?
When we look at the last 25 years of the Visegrad Four economies, we see that they are doing pretty well. Poland doubled its GDP in last 20 years. When we look at statistical data from the Czech Republic, Hungary, Slovakia – we did well, as economies. It was driven by talent – we discussed that – and it was driven by open economy. These are open, flexible, export-oriented economies, generally welcoming towards investors. And it was driven by good absorption of technology.
The economies here were able to absorb technology from the outside – either through investors like us, or through local companies that created pretty effective industrial policies. Our countries are also highly industrialised. When we look at the gross industrial output , it’s higher than the European average. And now the question is: will that model work for another 20 years?
I think that there are limitations to growth. Sooner or later, that potential will be exhausted. Therefore, the task ahead of us – our companies, small and medium enterprises, local companies, institutions and the government – is how to create more innovation here, especially innovation coming from the region. How can we add more value-added technology in the region? We have to make the R&D much more effective.
There are two interesting points to make here. The first one is: how much money is spent on R&D? Countries in the region spend approximately 1% of GDP, which is below OECD average. Another issue – or “potential for improvement”, to be positive – is how to make R&D spending more efficient. How to make research results turn into marketable, commercial products, so that spending on R&D has a real impact on the GDP and the economy. Today this process is limited.
Could you give me some examples?
Among the world’s top 100 patent applicants there is not a single Central European company. What is also interesting is that only two public institutions are on that list. One of them is Frauenhofer Institute from Germany.
First of all, this tells us that public institutions are probably not efficient enough in turning their R&D into patents, and a patent is the indication of the actual commercial potential of an innovation. Central Europe is definitively not enough in the game. In 2015 Poland filed 568 patent applications, which would be ranked 28th in Europe, while by the size of the economy it ranks as the 6th. Meanwhile, a country like Switzerland filed 7000. Most of the filings in Europe come from companies. Phillips is number 1, Samsung is number 2 – we are talking about over 2000 patents last year. GE, with 1300 patents, is also in the top 10.
A lot of R&D money spent here goes to institutions. We need institutional research, which is done by the classic, top-down R&D institutes, driven by the government, to be more connected to the economy and the private sector. That relationship needs to be much stronger.
What sort of policies would help to achieve that? Tax exemptions? A new education policy? What would you expect?
There are several factors. In order to navigate between them, we use a tool we call an innovation barometer. We are in dialogue with the industries to find out how they think about innovation, what issues they challenge, etc. That way we get an estimate of how innovation is perceived here and what is happening. We are now finding out that private companies and entrepreneurs are well aware of the technological change and bet on innovation as the future source of growth.
A new business model is absolutely essential because there is more and more technological Darwinism in the business. One needs to be sharp and fast with innovation, even in order to survive. If the market overhangs you, your business becomes outdated. We see the same thing, which is why GE is plugging into the digital wave of innovation. On the other side, 65% of respondents said that they would rather invest in incremental innovation and take less risk. Here is where the public-private connection can help.
It’s about the mitigation of risk. Helping private companies take bigger bets and go for the innovation that is riskier, but can be a breakthrough. This is the area where we can create a collaborative environment together. In fact, more and more companies realise that you cannot do everything by yourself. You need to collaborate, you need a whole ecosystem, and it’s about trusting to share the risk, but also the wins. This is the challenge for Central European economies – to make the system more inclusive for various types of actors from private companies, universities and big companies. Then we can overcome the threat of the middle income trap and our economies will be more productive.